AUD MCQ – Completeness of Dividend Income
An auditor concerned with the completeness of dividend income would most likely:
A) Review the minutes of board of directors meetings for approval of dividends
B) Send confirmations to a sample of companies in which the client owns stock
C) Review dividend record books produced by outside service companies
D) Trace recorded dividend receipts to inclusion in the cash receipts journal
Review dividend record books produced by outside service companies is correct. Dividend income is income that a company receives from owning stock in another company. When a company issues dividends, a 3rd party broker (i.e. E-Trade or Robinhood) would help verify the shareholders and who is entitled to receive the dividend.
Since this question is focused on the completeness of dividend income, the auditor is testing to make sure that the company’s financial records include all of the dividend income the company was entitled to receive. The auditor would obtain the dividend record books produced by outside service companies and trace the transaction to the company’s cash receipts journal to verify it was properly recorded. This procedure would test for completeness as it would identify any transactions that should have been recorded but were not.
Review the minutes of board of directors meetings for approval of dividends is incorrect. Reviewing for approval of dividends would not test if dividend income was recorded in the financial statements. This would only test if the dividend was appropriately approved.
Send confirmations to a sample of companies in which the client owns stock is incorrect. This may be useful to help verify the existence of dividend income, but it would not test completeness. Since the audit team would select which companies to send confirmations to from the financial records, if a transaction was missing, sending confirmations would not identify the issue.
Trace recorded dividend receipts to inclusion in the cash receipts journal is incorrect. This would test the existence assertion. The audit team is testing to make sure that dividend income recorded has a corresponding receipt of cash.
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Where is dividend income recorded in the cash flow statement?
If the company receives dividends from an investment, that is considered dividend income. Any dividend income should be recorded in the operation section as a cash inflow. Dividends received is #3 in the visual below.